Account For Depreciation, Save Your Budget

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Photo: flickr/youngthousands

The 21st century doesn’t seem to prevent technology from aging rapidly and becoming obsolete after a couple years. A couple of my devices recently died, and I’m on the cusp of another big tech failure. I just don’t have the money to replace anything. This could spell trouble for my precariously balanced budget.

My devices are failing me

Three months ago, my Amazon Kindle broke. I traveled the globe with that device and read hundreds of books over its lifespan. After four years of heavy use, the screen died and the internal motherboard stopped working properly. It probably didn’t help that I spilled a glass of orange juice in the keyboard of this device (watch out for this theme). Rather than simply throw it away, I auctioned it off on eBay and recouped about $25. Not bad considering it was broken and about four years old.

Amazon’s Kindle costs about $120.

I just chucked my Apple headphones in the trash. After nearly two years of intense use and travel, they’re broken. I don’t go a day without listening to music on my iPhone, and most of the time I used those headphones. I had tried extending the life by using electrical tape and trying to reseal certain areas on the headphones. For a while, that worked. Unfortunately, they worsened. They’ve been answering/ending phone calls automatically and starting/stopping music at random. Not a pleasant surprise when you begin answering phone calls to telemarketers.

Apple’s in-ear “earpods” cost about $30.

What if my computer breaks?

I bought my 13″ Macbook Air in mid 2011. It’s my favorite computer I’ve ever owned, and I’ve avoided an upgrade. While I still yearn for a newer model, I can’t afford to buy one right now.

Like my other devices, it gets exposed to some serious travel and abuse. After about a year of owning the laptop, I spilled a full glass of chocolate silk in the keyboard (notice the theme?). It fried the top assembly. I brought it to a repair store to try and save it — the cost was about $400 to fix. I remember looking at that price and thinking, “I could buy a brand new Windows laptop at that cost.” I decided to go ahead with the repair, as the system could be saved.

Now, about three years old, my trusty laptop is starting to slow down. I can tell that the cooling fans aren’t working properly. This is likely damaging important processor components and could threaten my data. It’s a recipe for disaster. At some point, my laptop will likely overheat and fry itself. Until then, I work on nearly everything in the cloud and save frequently.

Apple’s Macbook Air costs about $1000.

Account for losses, use depreciation schedules

When you purchase a computer, like a new car, it immediately loses a bit of value. Over time, the depreciation continues. The Internal Revenue Service (IRS) has specific tax depreciation rules that can be used for the following:

Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.

These properties can be deducted from income schedules, but are only to be used by businesses. You cannot deduct for physical product depreciation as an individual. Luckily for me, my computer is primarily a business tool — seeing as I use it to write.

Screenshot of a Modified Accelerated Cost Recovery System calculator

Irrespective of whether you can claim a tax deduction, it’s important to learn to account for depreciation in vehicles, electronics, and intangibles (i.e., software). But this is where calculations get sort of complicated. Essentially, depreciation is a governmental science that averages your losses on a product, which is based on your cost basis (the original price paid). If I bought my computer in 2011 for $1000, then the depreciation expense that can be deducted from my taxes is $58. That’s a loose estimate from this calculator.

Even if you don’t claim business tax deductions, calculating depreciation through this method and then including the $58 loss in your budget for 2014 is very important. If I had properly accounted for the further losses of my headphones, the Kindle, and my Macbook Air, I would be in a better financial situation.

Eventually, things fall apart. It’s a known truth. After losing my Kindle and headphones to failure, I looked at about $125 in losses. If my computer goes, too, I’m in trouble. In the future, I’ll be looking to account for depreciation to avoid budgetary surprises that could leave me reeling.

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Comments

This is where an emergency fund comes into play. Forget a few hundred for electronics. Every time something goes wrong on my car, I end up with four-figure expenses I wasn’t really planning on spending!

We always try to think of this in terms of the big picture: we want to spend our money on things that increase in value (like rental properties) rather than things that decrease in value. It keeps us motivated to keep the purchase of “stuff” to a minimum!

I’m sorry everything happened to go wrong in such a short time frame! Failing technology can be a pain. I purchased a refurbished Macbook Air for a total of $850, and if I get around 5 years out of it, I’ll be elated. I try to be careful with my technology purchases and buy reliable brands, but anything can happen. I did drop my other laptop on more than one occasion, causing the headphone jack to break. I make sure to handle everything with care now.

I worry about my desktop giving up on me eventually but I know it is bound to happen. I just hope not soon because my budget cannot afford a replacement yet. That goes to show I can so relate to your post but reading it made me realize I need – no, I must – have a desktop replacement emergency fund ASAP!

Never buy tech new. It’s like buying a new car. It’s an asset that depreciates rather quickly and/or becomes obsolete after a few years. I just wrote an article abut how I bought a used laptop on eBay ( not the latest model) slapped on a free OS (Lubuntu) and could not be happier. Linux is one way you can save hundreds on instead of going with Windows or Mac software.